IMF Warns Against Adopting Bitcoin As National Currency

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According to the International Monetary Fund (IMF), the adoption of cryptocurrencies like Bitcoin as legal tender could have dire consequences.

IMF urges Governments to proceed with Caution

In a blog post co-authored by Tobias Adrain, Director of the IMF’s Monetary and Capital Markets Department, and Rhoda Weeks-Brown, Director of the IMF’s Legal Department, the International Monetary Fund commented on recent moves made by countries such as El Salvador, Paraguay, and Panama, to adopt Bitcoin as legal tender. 

Cryptocurrencies and other forms of digital money for their “potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers”, the two IMF executives state that the adoption of crypto as a national currency is a short-cut to these benefits. The blog article warns that the move could lead to financial instability:

Government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa. Also, monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. […] As a result, domestic prices could become highly unstable. Even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of market valuations.

Furthermore, Adrain and Weeks-Brown mention several other risks associated with cryptocurrencies, such as cybercrime, money laundering, and the environmental burden of crypto mining. Overall, the authors come to the conclusion that the risks of adopting Bitcoin as legal tender outweigh the benefits. Earlier this month, US State Secretary Victoria Nuland came to the same conclusion while on a visit to El Salvador. 

An interesting social Experiment

Although the bill to give Bitcoin legal tender status in El Salvador was approved with a 64-22 majority by the Salvadoran parliament, many residents of the Latin American country took to the streets to protest against the decision. Polls show that the majority of citizens are opposed to El Salvador’s Bitcoin adoption. Nevertheless, the bill is set to go into effect on September 7th. 

For businesses, the adjustments to digital payments should be relatively smooth, since the Salvadoran national bank provides custodial Bitcoin wallets that could allow for the instant and automatic conversion of Bitcoin into fiat. Adrain and Weeks-Brown see another, yet hardly understandable problem with this, stating that “households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.”

The sentence above shows how the Keynesian mentality is still deeply rooted in the minds of monetary playmakers. After all, the IMF authors seem to be under the impression that investing in assets is not a productive activity. This could not be further from the truth. In fact, if the citizens in a national economy manage to increase their wealth by becoming financially literate and making sound investments, the effects can only be positive in the long run. 

El Salvador’s Bitcoin adoption will certainly be an interesting social experiment, but it is hardly compatible with the still dominant paradigm of Keynesian economics and fiat money. This will almost certainly lead to teething trouble and economic hiccups at first, but remember that the success of economic policy should not be measured in months or years, but decades to come. Starting September, we will learn more about what happens when you suddenly cut off a fiat-addicted national economy from its inflationary fix.

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